3 Cheap Stocks for Value Investors

First Solar, Skechers and Robert Half make the grade.

After my drive to Atlanta turned into a nightmare, with every possible traffic condition slowing me down, I finally got to my hotel for the FIG Bank CEO Forum. I settled in and dug through some of my reading pile while watching a little baseball.

One of the articles I went over was by Wesley Gray of Alpha Architect. He penned a piece last week titled Worst idea Ever on the subject of value investing. He covered the fact that even though Value works -- and works very well over time -- there can be period of underperformance that many investors just find too uncomfortable to tolerate. Having experienced that many times in my career, I know exactly what he was referring to. Lagging the indexes for an extended period of time can be a career killer if you are investing other peoples money, and for that reason, many professionals find it tough to stick with a long-term value approach.

Gray's article also linked to his original paper on the value approach he favors. He narrows the universe down to the top 60% by market capitalization, looks for stocks that are cheap on several different value measures and then underwrites for financial strength and quality. I decided it would be worthwhile to run some screens based on his value criteria and see what we found that qualifies as cheap in the current market.

I started with the measure I know that Dr. Gray favors above most others. He has written on numerous occasions -- including in the excellent book, Quantitative Value, that he co-authored with Tobias Carlisle -- that his work shows the best measure of value is enterprise value to earnings before interest and taxes. He and Tobias have slowly converted me on this idea, and I think that it is probably the best measure to use for non-financial stocks. It is the one that most private equity firms use to measure value, so it makes sense to look at companies in the same way as potential buyers. I looked for companies with single-digit EV/Ebit ratios that also passed Gray's size, financial strength, and quality measures.

Consistent with every other value screen I have run in recent months, it is a very short list. Just 15 companies make the grade right now. The cheapest is First Solar (FSLR) . The solar solutions company has been in free fall all year, and is down 47% so far in 2016. While solar is on my list of 100-to-1 hunting grounds for the longer term, in the short term it has been tough, as demand has been slower than expected and competition remains fierce.

Customers expect prices to fall further, and there is some hesitation due to the upcoming presidential election and the possibility of changing incentives for installing solar panels. First Solar is financially strong and should be a survivor, but it could be a very bumpy ride. The stock currently trades with an EV/Ebit ratio of less than 3, so it is certainly cheap.

Skechers (SKX) has been falling steadily this year as well, and now makes the list of potential cheap stocks. The shoe business is very competitive, and companies go in and out of style -- and it appears to be Skechers' turn in the penalty box. I have not bought a pair of shoes since I got married. Every once in a while, I find that the old pair is gone and a new one has taken its place, and it is usually a new pair of Skechers. I am currently wearing a pair of the company's shoes that has what they call Gaga Mat technology, and I can tell you that they are the most comfortable walking shoes I have ever worn. Skechers has the financial strength to deal with its short-term difficulties, and I think in the long run the company and the stock will do very well. The stock currently traded with an Ev/Ebit ratio of just 8.1, so it appears cheap given its excellent growth prospects and financial condition.

I have been mulling staffing companies for some time, and while I have been early, I still think the prospects for the industry are solid. Robert Half International (RHI) is an industry leader in staffing and consulting -- and makes the list of potentially cheap stocks with an Ev/Ebit ratio of just 7.8. The stock is yielding 2.37%, so you enjoy a decent dividend with this stock, and management has a good record of dividend increases over time.

Finding cheap stocks that pass quality measures and are financially strong has turned into an arduous task after seven years of rising prices, but there are still a few names out there that make the grade. Tomorrow I will look for companies that pass the cheap test using my favorite measure of value. Stay tuned.

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At the time of publication, Melvin had no positions in the stocks mentioned.

The insider purchases were at an oil refiner, a video game maker and a retailer of recreational vehicles.

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